InvestmentFinancial Glossary
Expense Ratio
Definition
The annual fee charged by a mutual fund to cover management, administration, and operational costs, expressed as a percentage of AUM. A fund with an expense ratio of 1.5% deducts Rs 1,500 per year for every Rs 1 lakh invested, reducing your effective returns.
Why It Matters
Expense ratio is one of the most reliable predictors of fund performance. Over a 20-year SIP, the difference between a 0.5% and 2.0% expense ratio can reduce your final corpus by 20-25%. Index funds and ETFs typically have expense ratios below 0.3%, while actively managed funds charge 1-2.5%.